The problem of private investment (Part 1)

Complaining about the level of private investment and what it implies about the state of the economy has become a favourite pastime of Bangladeshi economists.

The narrative seems to be this: People are not investing, that’s why the banks are sitting on a lot of idle cash, and all of this means the economy is not in great shape.

That narrative may or may not be true in the final analysis. But linking bank liquidity with private investment may not be the best way of arriving at such a conclusion.

Generally speaking, it of course makes sense to link bank liquidity with private investment. After all, banks lend money to businesses to invest. Or to put it in another way, the supply of investable cash depends on the banks, while the demand for that cash comes from businesses.

While most pundits claim that there is no problem with the supply of cash, and that the problem is mostly on the demand-side, it is worth investigating the actual numbers on investment to reach a conclusion.

Investment growth is pretty good

According to the Bangladesh Bureau of Statistics, total investment in Bangladesh in the fiscal year 2015 was Tk437,865 crore. The private sector accounted for 76% of that total investment, with the rest coming from the government.

Moreover, private investment has, on average, grown by 14% annually in the last 10 years, rising from Tk99,271 crore in 2006 to Tk334,472cr in 2015. Double digit growth in any economic indicator is impressive, and an average of 14% annual growth in private investment over a decade can hardly be dismissed as low or weak growth.

Nevertheless, when most economists complain about slow investment growth they tend to point to a different figure, which is the share of private investment in terms of GDP. Private investment as a share of GDP has hovered around 21-22% for the last 10 years.

If the government can use the remittance savings of overseas Bangladeshis to finance higher public investment, why can’t the private sector do the same?

More significantly, public investment as a share of GDP has grown from 5% to 7% over the same period, accounting for the overall increase in total investment share of GDP.

In other words, the government has accelerated its investment spending while private sector investment has kept pace with GDP growth. Chart 1 illustrates the trend in investment share of GDP over the last 10 years.

Why isn’t private investment as a share of GDP growing?

An accurate way of answering that question involves looking at how much of our total national savings is invested every year.

One simple theory in economics suggests that total investment in an economy depends on total savings and/or international debt, including development aid.

Total savings by all Bangladeshis, living at home and abroad, was equivalent to 39% of GDP in 2015. Domestic savings by Bangladeshis living at home was equivalent to 22% of GDP.

It is no coincidence that private sector investment and domestic savings as a share of GDP has been the same in recent years, as illustrated by Chart 2.

The chart demonstrates that private investment in Bangladesh has mostly depended on the level of domestic savings. It implies that under the status quo for private investment as a share of GDP to grow domestic savings has to be much higher.

But that’s only half the story.

The other half of the story is that public investment by the government appears largely to be financed by foreign savings, mainly in the form of international remittance sent by Bangladeshis living abroad.

It begs the question -- if the government can use the remittance savings of overseas Bangladeshis to finance higher public investment, why can’t the private sector do the same?

We attempt to answer this question in part two of our series on private investment in Bangladesh.